Question

Smith Company purchased inventory for $5000 on account. Freight cost was $600 paid in cash. The...

Smith Company purchased inventory for $5000 on account. Freight cost was $600 paid in cash. The Freight terms were FOB destination. The inventory was sold to customers for $8000. Freight cost was $600 paid in cash. The freight terms were FOB shipping point. Based on this information,

A. Gross margin would be $2400

B. Net income would be $3000

C. Net income would be $1800

D. None of the answers are correct.

Business   Accounting   
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Homework Answers

Answer #1

FOB Destination : The seller pays the freight charges.

FOB Shipping : The buyer pays the freight charges

In the given case, Smith Purchase the inventory with the freight term FOB Destination. In this case the freight charges are borne by the Vendor and the sale is made with freight term FOB Shipping where the fright charges is borne by the customer. In nutshell, neither the in ward freight nor the outward freight will be borne by Smith Company.

Particulars Amount
Sales $8,000
Inventory Cost ($5,000)
Net Income $3,000

Correct Answer is option (B) i.e. Net income would be $3000

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